Banks' struggles in mortgage business linked to outdated technology

U.S. banks are paying a sizable price for failing to modernize their mortgage application processes in the internet age, according to a study from researchers at some of the nation’s top business schools.

The recently published paper found that deposit-taking banks have fallen behind certain nonbank competitors that let their customers apply for home loans online. This technology gap is hurting banks in two ways, according to the study, which was co-written by business school professors at the University of Chicago, Stanford and Columbia.

First, the banking industry’s steep loss of market share in the residential mortgage business can be attributed partly to its slow adoption of new technology. And second, more tech-savvy nonbank lenders have been charging comparatively high interest rates, suggesting that banks could generate more revenue by enabling online mortgage applications.

“Some borrowers are willing to pay for the convenience,” said Tomasz Piskorski, a professor at Columbia Business School and one of the paper’s co-authors.

“The convenience is because you’re able to do all this shopping online, and very quickly and easily, in the comfort of your home,” added Amit Seru, another co-author and a professor at the Stanford Graduate School of Business.

The researchers used a novel technique to investigate recent changes in the mortgage market: They took a group of more than 40 nonbank mortgage lenders and divided them into two subgroups — those that enable customers to substantially complete the mortgage application process online, and those that do not.

Then they took their findings about those two subgroups and compared them against data from more than 30 banks, including many of the nation’s largest depository institutions.

By sorting the nonbank lenders into two categories, the researchers were able to isolate the effects of technological differences from regulatory factors, which they concluded were the biggest reason that banks lost substantial market share between 2007 and 2015.

The study found that the more tech-savvy nonbank mortgage lenders tend to specialize in the refinancing business, where they benefit from the fact that some steps from the home buying process do not need to be duplicated.

The researchers also determined that borrowers who refinance with these more innovative firms — which include Quicken Loans, one of the nation’s largest mortgage originators — tend to be more creditworthy and better educated.

So why are the banks failing to keep pace? Piskorski argued that it is difficult for big institutions that have invested heavily in branch networks to revamp their business models quickly.

Late to the party

Columbia Business School professor Tomasz Piskorski is the co-author of a study that explores why banks have suffered steep declines in market share in the mortgage business. The technology gap between banks and some of their nonbank competitors is one of the key reasons identified.

“I think it takes time. I know that banks are trying to catch up,” he said.

The research findings overlap with some of the results from a 2016 J.D. Power study of customer satisfaction regarding their mortgage experience.

J.D. Power found that among customers who got their mortgages from banks, only 18% completed a detailed application online, versus 31% for customers of nonbank lenders.

“We are increasingly seeing that online interactions play an important role in the experience as consumers’ expectations for transparency and communication increase,” Craig Martin, senior director at J.D. Power, said in an email.

“In many ways, the consumers’ broader online experiences are shaping their expectations for what is possible and how they wish to interact.”

Quicken Loans, which has finished first in J.D. Power’s customer satisfaction rankings for seven consecutive years, offers an online product known as Rocket Mortgage. The product has been available since 2015, and the company began a big marketing campaign in February 2016.

Last year, roughly 7% of the Detroit lender’s loan volume went through the Rocket Mortgage platform, according to Bill Emerson, vice chairman of Quicken Loans. But over time, more of the company’s customers are choosing the online application process, he said.

“They love the convenience, the ease, the ability to do what they want to do when they want to do it,” Emerson said. “It gives them the ability to understand the process.”

Still, it is far from clear that following the Quicken Loans playbook offers a cure for what ails banks in the mortgage origination business. The entire industry is plagued by fast-rising costs and razor-thin profit margins, said Terry Wakefield, a technology consultant.

He argued that mortgage lenders need to get their costs under control by undertaking root-and-branch overhauls of their technology systems, rather than just changes to the customer-facing parts.

“The underlying technology that supports this industry needs to be thrown into the garbage can,” Wakefield said.